Free Payroll App > Payroll Courses >

About HRA Calculation

House Rent Allowance, or commonly known as HRA, is an amount which is paid by employers to employees as a part of their salaries to employees for paying their house rent. This allowance is on the basis that the employee is renting a place for accommodation for his work purpose.

How is HRA Calculated?

The amount of HRA given depends on the employer. Salaried employees can claim HRA to reduce their tax payments either fully or partially. The decision of how much HRA needs to be paid to the employee is made by the employer on the basis of a number of different criteria such as the salary and the city of residence.

How much HRA can be claimed?

 

How much House Rent Allowance one can claim is different as per different laws.

  • According to the Income Tax Act, the exemption limit for HRA is 50% of one’s basic salary plus dearness allowance, for employees living in metro cities. This is valid for employees living in cities like Mumbai, Delhi, Kolkata, Chennai. For employees living in other 2-tier and 3-tier cities, the exemption limit is 40% of their basic salary plus dearness allowance. This IT Act only explains the exemption limit for HRA and does not give any restrictions.

 

  • According to the Code on Wages Act, the HRA is an excluded allowance and cannot be termed as a part of “Wages”. Although, this Act provides a cap on the total allowances given. It states that the total allowances, including HRA, cannot exceed 50% of the “Wages”. Any amount above will be taken as a part of Wages.

  • According to the Provident Fund Act, HRA is not a part of “Wages”. But this Act also does not specify the permissible percentage of salary which can be given as HRA. The new EPF amendment bill borrows the definition of Wages from the Code on Wages Act. Hence, the total allowance cannot exceed 50% of the salary as per this Act.

 

  • Lastly, as per the ESI Act, HRA is a part of the ESI wages. The ESI deduction is possible till a capped limit but no specific percentage for HRA is mentioned

 

What are the conditions for HRA exemption?

  • Only salaried employees can get HRA exemption. It is not a benefit available to self-employed individuals.

 

  • The employee has to be renting out his accommodation and not living in his own house.

 

  • The employee’s house rent should exceed at least 10% of his salary.

 

  • HRA is a part of the employee’s salary and should have a separate division for it.

 

  • Rent payment to a spouse is not acceptable.

 

How much HRA tax exemption is possible?

The HRA tax exemption is available on whichever is the least of the following amounts:

  • Condition 1

Your exemption cannot exceed the actual HRA amount received.

 

  • Condition 2 

Residents of metro cities cannot get over 50% of their basic salary plus dearness allowance. Meanwhile, non-metro city residents     cannot get over 40% of their basic salary plus dearness allowance.

 

  • Condition 3 

HRA claim cannot exceed your actual house rent minus 10% of the basic salary plus dearness allowance.

HRA Calculation Examples

 

Example 1:

The basic salary + Dearness allowance = Rs 3,00,000

HRA = Rs 1,00,000

Actual rent paid = Rs 1,20,000

 

HRA exemption as per

Condition 1 – Rs 1,00,000

Condition 2 – Rs. 1,50,000

Condition 3 – Rs 90,000

 

Thus, actual HRA exemption = lowest amount of conditions 1, 2 and 3 = Rs 90,000

 

Example 2:

The basic salary + Dearness allowance = Rs 3,00,000

HRA = Rs 1,00,000

Actual rent paid = Rs 2,00,000

 

HRA exemption as per

Condition 1 – Rs 1,00,000

Condition 2 – Rs. 1,50,000

Condition 3 – Rs 1,70,000

 

Thus, actual HRA exemption = lowest amount of conditions 1, 2 and 3 = Rs 1,00,000

 

Example 3:

The basic salary + Dearness allowance = Rs 2,70,000

HRA = Rs 1,30,000

Actual rent paid = Rs 2,00,000

 

HRA exemption as per

Condition 1 – Rs 1,30,000

Condition 2 – Rs. 1,35,000

Condition 3 – Rs 1,73,000

 

Thus, actual HRA exemption = lowest amount of conditions 1, 2 and 3 = Rs 1,30,000.

 

 

Bonus Tip

Individuals living with parents can also take the advantage of HRA exemption under the following conditions: 

  • Form a rent agreement with your parents and pay the house rent to your parents and thus claim the HRA benefit.

  • The parents have to show the house rent as rental income and show it in their tax filing. 

 

Note: You need to actually transfer the house rent amount to your parent’s bank account for the purpose of tax filing. 

 

If your parents are retired or not earning then this process can help the family a lot of money in taxes.